David Cameron is facing the first cracks in the Coalition after derailing a
new European Union treaty.

The Prime Minister was warned that Britain would not be able to ward off a wave of Brussels regulations aimed at the City.

Vince Cable, the Liberal Democrat Business Secretary, said the country had finished in a “bad place” after the acrimonious Brussels summit to resolve the crisis in the eurozone in which Britain stood alone against the 26 other EU nations.

Mr Cable’s view was shared by Ken Clarke, the Justice Secretary, the Tories’ leading EU supporter in the Cabinet. Mr Clarke said in a radio interview that the outcome of the summit had been “disappointing” and “very surprising”.

However, Mr Cameron was praised by virtually his whole party as the man who had stood up to the EU and put Britain’s interests first.

He vetoed an EU treaty because Britain was not allowed safeguards for its vital financial services industry.

One Tory MP said he was the heir to Margaret Thatcher. However, hardline Eurosceptics are now preparing to step up calls for a referendum on the relationship with Europe.

The Prime Minister will also have to steer a tricky course with the Lib Dems, whose backbenchers are disillusioned. He has given Nick Clegg, the Deputy Prime Minister, two policy “wins” which will be announced this week on domestic violence and forced marriages.

Mr Cameron also faced warnings last night that the City was in fresh peril from new taxes and regulations which can be imposed by Brussels. Experts said Britain was particularly at risk because regulations governing financial services remain the tools of the EU as a whole.

Many powers could be imposed on the City by qualified majority voting and Britain has no power to stop them. The lack of any allies in opposing the proposed new integration treaty reduced Britain’s chances of being able to fight off costly red tape, they said.

John Cridland, director general of the Confederation of British Industry, said: “Will Britain still be in a position to stop new financial regulations that come about as the eurozone becomes more integrated? That’s the elephant in the room. We are in uncharted territory.”

The first signs of a split inside the Cabinet came from Mr Cable. He told The Sunday Telegraph that Mr Cridland had given a “good assessment” of the dangers in Britain’s position as the only EU member state not to support the treaty providing greater fiscal integration for eurozone states. The Business Secretary said: “I am not criticising the Prime Minister personally. Our policy was a collective decision by the Coalition. We finished in a bad place.”

Separately, Mr Clarke said he had been discussing the result with “some of the people who took part”.

He told BBC Radio Nottingham: “It’s a disappointing, very surprising outcome. There will be a big statement made by the Prime Minister on Monday when I shall be sitting listening, and I shall be discussing what we are going to do now.”

However, Mr Cameron’s supporters continued to hail the Prime Minister this weekend. In an article for The Sunday Telegraph William Hague, the Foreign Secretary, said Mr Cameron had done the “right thing for Britain”.

“Our requests were moderate, reasonable and relevant, given the potential spillover from fiscal to financial integration,” he said.

“We did not go to Brussels seeking a row. It is a matter of regret that no agreement that was acceptable to all 27 EU countries could be reached. But it is better to have no change to the EU treaties than a change that did not protect our interests.”

George Osborne, the Chancellor, said Mr Cameron’s use of the veto was the “right thing for our country”.

He told the BBC: “It’s been a tough decision … but it has helped protect Britain’s economic interests.”

When asked if Mr Cameron had left the City unprotected from future financial regulation by leaving Britain “without a seat at the table”, Mr Osborne said: “We have protected all these industries from the development of eurozone integration spilling over and affecting the non-euro members of the European Union.

“Many of the City have welcomed what we have done.”

However, leading City figures warned that Britain was vulnerable to a further attack.

Terry Smith, chief executive of Tullett Prebon, the stockbroker, said: “The EU, and Germany and France in particular, envy the strength of the City.

“They would like to divert as much of its activity as they could to Frankfurt and Paris.”

Lord Heseltine, the veteran Tory Europhile, warned Mr Cameron that he could not protect financial services in Britain by cutting the country off from Europe.

“He can’t safeguard the City, because it is markets that will determine how Britain features in the evolving Europe,” he told Radio 4’s Today programme.

Hardline Tory Eurosceptics will step up demands this week for a referendum on Britain’s relationship with Europe, which Mr Cameron is desperate to avoid after a Commons rebellion in October which saw 81 of his backbenchers call for a plebiscite. However, there were signs that moderate Euro-sceptics were less likely to push for a national vote.

Andrea Leadsom, of the Fresh Start group of Eurosceptic MPs, used a commentary for The Sunday Telegraph to attack Nicolas Sarkozy, the French president.

She wrote: “Sarkozy commented that the EU shouldn’t accede to Britain’s demand because it was 'deregulation that largely got the Eurozone into this mess’ … what utter rubbish!

“European leaders must surely accept that it was their borrowing and spending policies that caused the current crisis.”

Mr Cameron was cheered at a dinner for Tory MPs at Chequers, his country retreat in Buckinghamshire, on Friday. Andrew Rosindell, a hardline Eurosceptic, said: “He did what I would have expected Margaret Thatcher to have done.”

But Liberal Democrats warned against rejoicing. Norman Lamb, Mr Clegg’s parliamentary private secretary, said: “Our new position comes with very real risks. To be in a minority of one is not good.”

Lord Ashdown, a former Lib Dem leader, said: “The anti-European prejudice of some in the Tory party … has now created anti-British prejudice in Europe.”

Senior European politicians and officials say Mr Cameron’s stand will have severe consequences. Martin Schulz, the German euro-MP who will become the president of the European parliament early next year, said Britain could be forced to quit the EU.

Elmar Brok, a senior German Christian Democrat euro-MP who is close to Angela Merkel, the German chancellor, said the EU “must now marginalise Britain, so that the country comes to feel its loss of influence”.